Does Universal Credit affect my credit score?

The cost-of-living crisis has left many families feeling the pinch and turning to help like Universal Credit.

If you’re thinking of applying, or you’ve just started receiving this benefit, you may be wondering if it impacts your credit score.

In this article, we're going to lay it all out for you. We'll cover what Universal Credit means for your credit, and if it matters when you're looking to apply for things like car finance.

Got a specific question? Why not jump to:

• What is Universal Credit?
• Will Universal Credit affect my credit score?
• Will benefits be visible on my credit history?
• What will affect my credit score?
• How can I improve my credit score?

What is Universal Credit?

Universal Credit is a type of benefit provided by the UK government to lend a helping hand to those earning little to no income.

It began to replace the Welfare Reform Act in April 2013, which consisted of six separate benefits, including:

• Income support
• Child tax credit
• Housing benefit
• Income based jobseeker’s allowance
• Income related employment and support allowance
• Working tax credit

Anyone in the UK of working age can apply, but to be eligible you need to have less than £16,000 in money, savings, and investments.

Rather than providing a fixed amount, the support you receive from Universal Credit is based on your personal situation. It aims to provide just the right amount of help to those who need it.

Will Universal Credit affect my credit score?

Universal Credit won’t affect your credit score as it isn’t a form of credit. You don’t need to pay the money back, it’s simply there to boost your income when times are tough.

Your credit report is designed to keep track of your debts and how well you handle them. So, as it isn’t a debt, Universal Credit isn’t included in your score. 

Will benefits be visible on my credit history?

Benefits like Universal Credit won’t show up on your credit history.

Your report doesn’t keep tabs on the money you receive that isn’t meant to be paid back, like government benefits or grants.

What will show up is the loans you’ve taken out and repaid over time.

However, when it comes to applying for a loan, don't expect your benefit status to stay under wraps. Lenders will ask for proof of income, and that does include Universal Credit. They may also ask for proof of employment as well to help them build confidence that you’ve got a steady stream of income to help you comfortably cover your repayments.

Here at Carmoola unfortunately we will not accept an individual whose only source of income is Universal Credit.

What will affect my credit score?

Receiving Universal Credit may not affect your credit score, but there are plenty of other things that do.

Let’s break down some of the main factors that can influence your score:

Existing debts and how you handle them

Your credit report tracks how you handle all your debts, including credit cards, loans, mortgages, and even mobile phone contracts.

If you’ve missed payments or you are using most of your available credit, this will most likely  have a negative impact on your score.

Age and types of accounts

The types of accounts you have and how long you’ve had them will both impact your score. 
Lenders prefer those who have a long history of borrowing as it gives them more information to assess how reliable they are.

If you can show you’ve managed your accounts well over a period of years, you’ll be viewed as a reliable borrower.

Similarly having multiple different types of credit accounts helps too. If you successfully balance your credit cards, loans, car finance, and a mortgage, it’s a positive sign to lenders.

Hard searches

Whenever you apply for credit, the lender carries out a hard search. This shows up on your credit report and can impact your score.

If you have too many hard searches being carried out on your report in a short amount of time, it’s going to cause your score to temporarily drop.

While the impact of this is only short-lived, it’s still a good idea to limit the number of applications you make within a short space of time.

How can I improve my credit score?

If you want the best chance of getting a car loan, or any other type of finance for that matter, work on improving your credit score.

Begin by checking your credit report for any errors that could be dragging your score down.

Next up, make sure you pay those bills on time, every time. If you need to, set up direct debits so you don’t have to remember to pay them on a specific date.

Reducing how much you owe sounds like a no-brainer, but it's more than just paying back loans. It also means reducing how much of your available credit you're using.

Keeping old, well-managed accounts open can also give your score a little lift, showing a history of responsibility.

If you’re starting from scratch and don’t have a long history, consider credit builder products like a secured credit card or small personal loans.

Use them wisely to show you're up to the task of handling credit.

Remember, improving your credit score is a marathon, not a sprint. With patience and adopting smart financial habits, you'll see those numbers start to climb.